Around this time last year we expected high yield markets to rebound after an August reboot. However, as at the end of October we were looking at our global high yield benchmark losing 15% from the start of 2022. Against this, we did correctly predict that the global yield market would outperform gilts and sterling credit, and that emerging market debt would be a key area of weakness, delivering returns well below the US and European regions.
So, what went wrong? Where could our forecasts have improved? Like the majority of us, we did not foresee Russia invading Ukraine, and the resulting supercharge of inflation. The downstream impacts of inflation on interest rates and the increased risk of recession have been painful.
While outlook pieces stay etched in stone, fund managers have the advantage of revisiting assumptions as new information emerges – but do stay within a clear and consistent investment philosophy and process. Russia’s move into Ukraine forced us into a firmly defensive position. The US Federal Reserve’s unwavering commitment to dampen inflation with aggressive rate hikes – at a faster rate than previously indicated – became immediately apparent. However, what was still up in the air, was how the double whammy of the inflationary impact and sanctions on Russian oil, gas and other commodity prices would ultimately leave markets.
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